LBO Capital Structure

How does the financing mix change funding and repayment economics?

Two synthetic structures use the same purchase, operating forecast and 6× exit assumption in the LBO Model. A has lower debt and more sponsor equity; B has higher debt and a tranche combining cash-pay and PIK. Neither is presented as universally optimal or available from lenders.

LBO debt tranches: set amounts and terms

All money is EUR thousands. Example Company has 2026 actuals and forecasts for 2027–2031. Annual revenue 4,000 less COGS 2,000 and overhead 400 gives EBITDA 1,600. D&A and capex are 200 each, EBIT 1,400 and tax rate 25%. Working-capital changes and other operating inputs are zero; unlevered FCFF is 1,050 each year. Opening PP&E and equity are 5,000 each. NOL use is disabled; deal tax is paid in the same period.

Entry is after 2026 and exit after 2031: five years under the actual model-period dates. Entry and exit use reported EBITDA and 6× unless a case explicitly changes them, so each base EV is 9,600. Acquisition cash is explicitly overridden to 100 and existing debt to zero; other entry and exit bridge items and exit fees are zero. Purchase equity is 9,700. This acquisition cash is a supplied deal assumption, not the default book-year cash.

A: Tranche A 3,000 at cash rate 5%, PIK 0%, initial-principal amortization 10%, maturity 2033 and priority 0; Tranche B 500 at cash rate 7%, PIK 0%, amortization 0%, maturity 2034 and priority 1. B: Tranche A 4,000 at cash rate 6%, PIK 0%, amortization 10%, maturity 2033 and priority 0; Tranche B 1,500 at cash rate 2%, PIK 5%, amortization 0%, maturity 2034 and priority 1.

All tranches use Amount and are sweep eligible. Global cash sweep is 100%, minimum cash 200 versus acquired cash 100. Rollover is 600; management dilution and other sources are zero. Transaction fees are 1% of entry EV, financing fees 1% of new debt; direct fee overrides stay blank. PIK is deductible, no NOL use and no distributions. Priority labels represent the modeled repayment order, not legal seniority or intercreditor terms.

Reconcile financing layers to acquisition uses

A debt is 3,500, or 2.1875× entry EBITDA; B is 5,500, or 3.4375×. Both uses include purchase equity 9,700, cash top-up 100 and transaction fees 96. Financing fees are 35 for A and 55 for B. Total uses are therefore 9,931 and 9,951.

Subtract debt and fixed rollover 600: sponsor equity is 5,831 for A and 3,851 for B. Sources exactly match uses. The increased financing fee partly offsets the smaller sponsor cheque. LBO Sources and Uses develops this reconciliation in detail. With no management dilution, sponsor ownership is sponsor / (sponsor + rollover), so the fixed rollover also changes the ownership proportions.

Compare annual interest and priority repayment

First-year cash interest is 185 in A and 270 in B. B also capitalizes 75 PIK on its junior tranche. First-year mandatory repayment is 300 / 400; sweep then pays A before B in each structure. The minimum cash balance is retained before sweep, and cash interest declines as opening balances decline.

A clears all debt before exit and accumulates cash 1,605.21. B still has debt 1,177.48 and cash 200. Total cash interest is 459.73 / 822.22. PIK Interest isolates capitalization; LBO Cash Sweep isolates the repayment order.

Interpret sponsor proceeds and return trade-offs

At the same exit EV 9,600, exit equity is 11,205.21 for A and 8,622.52 for B. After each sponsor’s pro-rata share, sponsor proceeds are 10,159.78 and 7,460.19.

B requires less sponsor equity and gives a higher modeled MOIC 1.9372× / IRR 14.1393%, versus A’s 1.7424× / 11.7450%. Yet B has more interest, PIK and exit debt, less exit equity and lower absolute sponsor proceeds. The smaller denominator matters; higher returns alone do not demonstrate lower financing risk. MOIC vs IRR explains those metrics.

Reproduce the two structures

1. Download A: lower cash-pay debt and B: cash/PIK layers, and explicitly import each through Manage models → Import. In Model, switch to Advanced before editing, then return to Deals → LBO. A blank workspace may require Activate; the imported files already have LBO active. The CTA opens your workspace and does not import a file automatically.

2. Check the two rows under Debt structure against amount, cash rate, PIK, amortization, maturity, priority and Sweep in the tables. Under Transaction structure & ownership keep rollover 600, fees 1% / 1% and their direct overrides blank. In Cash / debt paydown use minimum cash 200 and sweep 100%.

3. Compare Sources & Uses, all five annual cash/debt columns and Sponsor returns. To reproduce B from A, change the two amounts to 4,000 / 1,500, cash rates to 6% / 2%, and junior PIK to 5%; retain all other displayed terms. Native files keep the alternative assumptions explicit.

Distinguish modeled structure from financing availability

Debt Model supports broader financing schedules. This page compares supplied funding composition; it does not establish underwriting approval, lender appetite, market-clearing pricing, legal documentation, covenant terms or intercreditor arrangements. Maturities after the modeled exit are assumptions, not refinancing commitments.

A mandatory maturity or other cash shortfall makes sponsor returns unavailable. There is no automatic choice of an optimal debt/equity structure. Initial funding, PIK mechanics and cash sweeps are treated separately in the linked worked examples.